Sleep treatment specialist ResMed Inc. (CHESS) (ASX: RMD) today announced flat sales and lower operating profits for the quarter ending June 2014, but saved face with investors by increasing the quarterly dividend 12% to US$2.8 cents per share.
The lower-than-anticipated quarterly results were the result of a worrying sales decline in its key North American markets. Recently selling for $5.50 (US$51.50) the market has been pricing ResMed as a growth stock selling on more than 21 times diluted earnings per shares of US$2.39 for financial year 2014. This growth stock status is likely to come under pressure as the weak North American numbers suggest changes to U.S. Medicare spending and reimbursement patterns have taken their toll.
The overall cost and use of ResMed's Continuous Positive Airway Pressure (CPAP) treatment for sleep apnoea has come under scrutiny in the U.S recently, and the effect now appear to be hitting ResMed's top and bottom line. Overall, ResMed managed to expand gross margin 20 basis points on the same period last year, despite a decline in the average selling price of its products. This thanks to manufacturing improvements, a favourable geographic mix, and favourable exchange rate movements.
With operating profits falling on the prior quarter and a tough outlook in its U.S. market, ResMed will be relying on new product launches and growth outside the Americas in the new financial year to return it to its growth stock status. Of course it's not just North Americans that suffer from sleep apnea and quarterly sales outside the Americas of US$200.3 million almost matched those inside at US$214.9 million. This is notable and illustrates how the global growth story remains a key factor in driving the stock forward.
The company's balance sheet remains strong, allowing it to continue its share buyback program in the most recent quarter and raising a dividend paid in U.S. cents before transfer to Australian investors. Assuming the company maintains the latest payout (US2.8 cents per share), a full-year payout of US11.2c cents per share is likely. This places ResMed on a yield of 2.03% when selling for $5.50. The effective yield will rise for Australian investors if as anticipated the U.S. dollar starts to strengthen over the Australian dollar in the coming year.
The outlook in the Americas remains uncertain, although over the medium and long term ResMed remains a solid prospect assuming it can readjust to the changing dynamics of the North American market. Investors may see price weakness today as an opportunity to buy what remains a promising global growth story over long-term horizons.
Shares look likely to come under selling pressure having closed at $5.50 on Thursday.
